Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.
You generally have until January 31 to prepare and mail 1099s to recipients. The penalty for not filing has gotten more expensive. The penalty structure is complex and there's a break for firms with under $5 million in annual gross receipts. But even small firms can be faced with a penalty of $270 per missed 1099. Clearly mistakes here can be costly. You can reduce the penalty if you file within a month; the penalty is also reduced, but not nearly as much, if you file no latger than August 31. This article isn't intended to provide all the details on filing 1099s. Rather, we want to make you aware of some frequently overlooked issues. If you find you need to file some 1099s and haven't, you can get forms at your local office supply store. Many stores also have a software package that will make it easier to process the forms. Better yet, there are a number of companies that allow you to input the information, print out hard copies for mailing (no form required) and they will semd the 1099s and 1096 transmittal to the IRS. There's a charge for filing with the IRS, generally priced on a per-1099 basis. In most cases it's worth the money.
Almost all information forms (1099-MISC, 1099-INT, etc.) are due to the recipient by January 31. Forms 1099-MISC with an amount in box 7 (nonemployee compensation) are due to the IRS on the same date. Most others may be delayed till February 28. However, once the forms to the recipients are completed, you've done 95 percent of the work. File with the IRS at the same time. There's generally no sense to delay.
Forms You May Have to File
1099-MISC. This is the one you're probably most familiar with. This is the form you use for independent contractors. Many businesses only consider those individuals who do work related to the purpose of the business. For example, a machine shop might give 1099s to a an outside accountant. But you have to provide a 1099 to any business other than a corporation who performs services for your business. For example, the auto mechanic who repairs the company truck; the electrician who came in to add outlets in your office; etc. You must also send a 1099 to the person to whom you pay office or other rent. That is, you don't have to send out a 1099 on rental properties if you're not in the trade or business of renting property, and the controversial requirement to send a 1099 to providers of goods as well as services doesn't apply. Here's a list of other payments that might have to be reported on a 1099:
Only report nonemployee payments on a 1099-MISC. If the individual is an employee, the amount should be reported on his or her W-2. For example, a bonus paid to an employee is reported on a W-2; a bonus to an independent contractor belongs on a 1099. (Amounts paid to the estate of a deceased employee are reportable on a 1099-MISC. Death benefits from nonqualified deferred compensation plans paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-MISC. Check the instructions.) You can't avoid withholding, FICA, unemployment, etc. by giving a worker a 1099-MISC when they really should be classified as an employee and get a W-2. But you may be able to reduce your penalties for misclassifying a worker as an independent contractor by giving him or her a 1099. The rules are involved. Talk to your accountant or tax advisor.
You don't have to send a 1099-MISC to a party that provides you only with goods. (See the comment above.) For example, you buy auto parts from a local distributor and one of your employees repairs the vehicles. But a 1099 is required to an auto repair shop even if the value of the services is relatively small. For example, it's $2300 for the parts; $150 for the labor. The 1099-MISC should be for $2450. If state or local sales taxes are imposed on the service provider and you (as the buyer) pay them to the service provider, report them on the 1099. However, if sales taxes are imposed on you (as the buyer) and collected from you by the service provider, do not report the sales taxes.
If you don't classify payments by vendor as well as by general ledger account, you should go through your records to see who you might owe a 1099. That can include the service that cleans the office; your attorney who's on retainer (or paid by hour); etc.
You generally don't have to report payments made to a corporation. The exceptions are payments to attorneys, for medical services, and fish purchases for cash. In these cases even if the provider does business as a corporation, the payments are reportable. What about other providers? Don't know if the business is a corporation, LLC, sole proprietorship? Did the person provide goods or services? Sending a 1099-MISC where one is not required has no adverse consequences (just more paper). Many businesses, even large ones, send 1099s to every vendor.
You must report fees paid by one professional to another, such as fee-splitting or referral fees. Report commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year. Fees paid to a nonemployee, including an independent contractor or travel reimbursement for which the nonemployee did not account to the payer, if the fee and reimbursement total at least $600.
Report a fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to you (the payer), if the fee and the reimbursement total at least $600.
When an escrow agent maintains owner-provided funds in an escrow account or a construction project, performs management and oversight functions relating to the construction project, and makes payments for the owner and the general contractor, the escrow agent must file Form 1099-MISC for reportable payments of $600 or more.
The reporting threshold for nonemployee compensation, services, etc. and rents is $600. If the amount paid during the year is $600 or more, you owe the recipient a 1099-MISC. (The threshold is only $10 in the case of royalties.)
For coin-operated amusements, if the arrangement between the owner of the amusement and the owner of the business establishment where the amusements are placed is a lease of the amusements or the amusement space, the owner of the amusements or the owner of the space, whoever makes the payments must report the lease payments in box 1 (Rents) if the total payments are at least $600. On the oher hand, if the arrangement involves sharing the gross or the profits, the activity might be a joint venture and you might have to file a partnership return.
Business travel allowances paid to employees should be reported on their W-2.
Do promotional drawings and award prizes or other awards? That's reportable on a 1099-MISC, but n box 3.
Include in box 7 the amount of all deferrals reported in box 15b that are includible in gross income because the nonqualified deferred compensation (NQDC) plan fails to satisfy the requirements of Section 409A.
1099-INT. This form is for interest payments. It's easy to overlook this one. But there's a good chance the business made interest payments to a shareholder for a loan. The business may have made interest payments on funds borrowed from an angel investor or relative, on accounts payable, etc. The reporting threshold is $10 for such payments. (The threshold for reporting may be $600 in some cases.)
1099-DIV. Regular (C) corporations that pay dividends have to report such amounts on a 1099-DIV. Whether or not a distribution is a dividend depends on a number of factors. Generally a payment from a C corporation's earnings and profits (similar to retained earnings) is a dividend. Dividends to a recipient of $10 or more are reportable. Liquidating dividends are reportable when they amount to $600 or more. (Under certain circumstances, distributions by an S corporation could be reportable dividends.)
1099-A. You may have to report the acquisition or abandonment of secured property for each borrower if you lend money in connection with your trade or business and, in full or partial satisfaction of the debt, you acquire and interest in property that is security for the debt, or you have reason to know that the property has been abandoned. You don't have to be in the business of lending money to be subject to this reporting requirement. You don't have to file a 1099-A if tangible personal property is used solely for personal purposes. The reporting threshold is $600.
1099-C. Report the cancellation of a debt of $500 or more owed to you if lending money is a significant trade or business for you. The lending of money is a significant trade or business if money is lent on a regular and continuing basis. The law contains a safe harbor. Generally if lending provides 10% or more of the organization's gross income, the lending of money is significant.
8027. Employer's Annual Information Return of Tip Income and Allocated Tips. This reporting requirement applies to receipts from large food or beverage operations, tips reported by employees and allocated tips. Check with your accountant or tax adviser for the rules.
1042. Use Form 1042S to report tax withheld on certain income of foreign persons, including nonresident aliens, foreign partnerhips and corporations, and foreign estates and trusts.
Reporting period. Forms 1098, 1099, 3921, 3922, and W-2G are used to report amounts received, paid, credited, donated, transferred, or canceled (Form 1099-C) during the calendar year.
Specific instructions. The IRS has some specific rules such as no dollar signs, no entry for zero amounts, etc. Using a software program to prepare the returns will automatically handle these issues. The programs are generally cheap and well worth it.
Retention rules. Generally, keep copies of information returns filed with the IRS or have the ability to reconstruct the data for at least 3 years (4 for Form 1099-C) from the due date of the returns. Keep copies of information returns with backup withholding for 4 years.
State reporting. You may also have to file state copies of 1099s. Check with the states where you do business or your tax advisor.
Can't overreport. Not sure if you should send a 1009-MISC to a vendor? As long as the dollar amount is correct and the amount is taxable to the recipient, you can rarely go wrong by sending a 1099 that's not required. For example, you reimbursed an independent contractor for his travel expense, but he accounted to you fully for the amount. Don't send a 1099.
Need more help? Download the General Instructions for Forms 1099, etc. or the Instructions for Form 1099-MISC or Instructions for Form 1099-INT. Don't hesitate to read the instructions. There are issues that can be more complex than you thought.
Copyright 2010-2019 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
--Last Update 01/23/19